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The wood-alternative decking leader saw its profits skyrocket thanks to higher volume and strong demand. Here's a closer look at what happened with Trex last quarter.

More homeowners are picking Trex for their decks. Image source: Trex Company Inc.

What:

Shares of Trex Company Inc (NYSE:TREX), the industry leader in wood-alternative decking, railing, and accessories, are up 11.3% at 2:21 p.m. EST on Nov. 8, following release of the company's third-quarter financial and operating results after market close on November 7. That puts the company's stock up 54% so far in 2016, a blistering performance in a relatively "blah" year for investors:

Trex significantly benefited from a combination of higher volume and lower manufacturing costs. Over the past year, the company has focused on improving its operating efficiency, and this has paid off in recent quarters as operating leverage continued driving big incremental profits.

Adjusting for $9.8 million in non-cash warranty-reserve charges related to legacy products, profits and gross margins were even stronger. Without this non-cash adjustment, earnings per share was $0.45, a 96% increase year over year, and gross margin percent was 37.5%, a 820-basis-point increase.

Now what:

Trex's guidance for the fourth quarter may seem weak on the surface at only 4%, but the caveat is that last year's Q4 was incredibly strong, up 20% from 2014, as deck projects continued through a very mild winter. If the company reaches this revenue guidance, full-year sales will have increased 8%. Management expects incremental margin for the full year to average 95% as material costs stay low and operating leverage remains high.

Looking even further ahead, Trex management expects the company will continue growing its market share. Expectations are for the composite-decking industry to grow sales in the mid-single digits in 2017, putting Trex on track to grow sales at or near the 8% rate management is counting on seeing at the end of the fourth quarter. And just as it has delivered this year, this increased volume will drive higher capacity utilization from its manufacturing facilities, further increasing operating leverage and incremental margins.

Bottom line: Trex has continued to exceed expectations over the past year or so, as strong demand for its products has combined with excellent operating leverage. As long as housing demand and the overall economy stay relatively strong, Trex is positioned to continue growing sales and taking market share.

Author

Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to Fool.com in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.
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